Introduction of New Series (2015): In January 2015, the Central Statistics Office (CSO), under the Ministry of Statistics and Programme Implementation (MoSPI), introduced a new series of national accounts statistics. This significant revision involved changing the base year for GDP estimation and adopting new methodologies and data sources. This was part of a regular exercise to capture the changing structure of the economy.
Base Year Revision: The base year was updated from 2004-05 to 2011-12. A base year is a reference point in a time series of economic data, like GDP, against which other years are compared. The revision is crucial for several reasons:
Structural Changes: The Indian economy underwent significant structural shifts between 2004 and 2011, with the services sector growing in prominence and new industries emerging. A new base year helps to accurately capture these changes in the GDP estimates.
Relative Prices: It updates the weights of different goods and services in the economy based on their current relative prices, providing a more realistic picture of economic output.
Improved Data Sources: The revision incorporated new and more comprehensive data sources, such as the Ministry of Corporate Affairs’ MCA-21 database, which provides detailed financial information on lakhs of registered companies. This replaced the less reliable data from the Annual Survey of Industries (ASI) for a significant portion of the corporate sector.
Methodological Changes: The most significant methodological shift was aligning the compilation process with the international guidelines set forth in the System of National Accounts (SNA), 2008.
Shift from Factor Cost to Market Prices: The headline GDP figure was changed from GDP at factor cost to GDP at constant market prices.
GDP at Factor Cost: Measures the total value of goods and services produced within a country, calculated from the perspective of the producers. It includes costs of factors of production (land, labour, capital, entrepreneurship) but excludes indirect taxes and includes subsidies.
GDP at Market Prices: Measures the same output from the perspective of the consumers. It is calculated as GDP at Factor Cost + Indirect Taxes - Subsidies. This is considered a better measure as it reflects what consumers actually pay.
Introduction of Gross Value Added (GVA) at Basic Prices: The sectoral estimates are now provided in terms of GVA at basic prices, which is an internationally accepted standard.
GVA at Basic Prices = Compensation of employees + Operating surplus/mixed income + Consumption of fixed capital + Production taxes - Production subsidies.
The relationship is: GDP at Market Prices = GVA at Basic Prices + Product Taxes - Product Subsidies. This distinction allows for a clearer analysis of growth driven by pure production versus growth influenced by tax and subsidy policies.
WHY GDP IS NOT A VERY GOOD MARKER TO MEASURE DEVELOPMENT
Exclusion of Negative Externalities: GDP calculations often fail to account for the negative side-effects of economic activity.
Environmental Degradation: As economist Simon Kuznets, one of the architects of the national accounting system, warned in the 1930s, GDP measures output but not welfare. For instance, GDP increases with industrial production but does not subtract the costs of air and water pollution, deforestation, or the depletion of non-renewable natural resources. This led to the development of concepts like “Green GDP”.
Social Costs: It does not account for social costs like increased crime rates, stress, or traffic congestion that might accompany economic growth in urban areas.
Neglect of Non-Market and Social Activities: GDP only measures transactions involving monetary exchange.
Unpaid Work: It omits the immense value of unpaid work, such as household chores, childcare, and elderly care, which are predominantly performed by women. Feminist economists like Marilyn Waring in her book “If Women Counted” (1988) have extensively critiqued this omission.
Social Fabric: Aspects crucial to human well-being, like family bonding, community cohesion, leisure time, and volunteer work, have no monetary value attached and are thus ignored by GDP.
Inclusion of Socially Negative Activities: Paradoxically, some activities that detract from social welfare contribute positively to GDP.
Disaster and Repair: The French economist Frédéric Bastiat’s “parable of the broken window” illustrates this. If a window is broken, the money spent on its repair is added to GDP. Similarly, expenditure on rebuilding after natural disasters, medical costs from accidents, or security costs due to high crime rates all inflate the GDP figure, even though they represent a loss of welfare. The money spent on repair work after a train crash is a stark example of this perverse accounting.
Indifference to Inequality and Distribution: GDP is an aggregate measure and provides no information about the distribution of income and wealth. An economy can have a high and rising GDP while a majority of the population experiences stagnant or declining living standards. Scholar Thomas Piketty in “Capital in the Twenty-First Century” (2013) demonstrated how wealth concentration can increase even in growing economies, a nuance completely missed by headline GDP figures.
Non-Inclusion of Social Development Aspects: GDP does not measure key indicators of human development.
Health and Education: A country might have a high GDP per capita but poor health outcomes (low life expectancy, high infant mortality) and low educational attainment. To address this, economists like Amartya Sen and Mahbub ul Haq developed the Human Development Index (HDI) in 1990 for the United Nations Development Programme (UNDP), which combines income with life expectancy and education levels to provide a more holistic view of development.
NATIONAL MULTIDIMENSIONAL POVERTY INDEX (MPI)
Conceptual Basis: Traditional poverty lines, such as those recommended by the Tendulkar Committee (2009) or Rangarajan Committee (2014) in India, are unidimensional. They define poverty based on a minimum level of consumption expenditure or income. However, poverty is a multidimensional phenomenon encompassing deprivations in health, education, and living standards, not just a lack of income. The MPI is designed to capture these overlapping deprivations.
National MPI in India:
Nodal Agency and Initiative: NITI Aayog is the nodal agency for the National MPI. This initiative is part of the government’s broader Global Indices for Reforms and Growth (GIRG) mechanism, which aims to leverage global indices to drive reforms and improve India’s performance on key social and economic parameters.
First Report (2021): The first-ever National MPI Baseline Report was released by NITI Aayog in November 2021. The report was based on the reference period of the National Family Health Survey 4 (NFHS-4), conducted in 2015-16. It provided a baseline for tracking progress. Subsequent reports have used NFHS-5 (2019-21) data to show progress over time.
Methodology (Alkire-Foster):
The National MPI uses the globally accepted and robust Alkire-Foster (AF) methodology, developed by economists Sabina Alkire and James Foster. This methodology identifies poverty at the individual or household level.
Dimensions and Indicators: It retains the three dimensions of the Global MPI: Health, Education, and Standard of Living, with the same ten indicators. However, India’s National MPI has added two indicators - Maternal Health and Bank Accounts, making it a total of 12 indicators.
Dual-Cutoff Method: The AF methodology employs a dual-cutoff system to identify the poor:
Deprivation Cutoff: First, it determines whether a person is deprived in each indicator (e.g., a household is deprived in nutrition if any adult or child is undernourished).
Poverty Cutoff: Second, a deprivation score is calculated for each person by summing the weighted values of the indicators in which they are deprived. A person is identified as “MPI poor” if their deprivation score is equal to or greater than the poverty cutoff. For India’s National MPI, this cutoff is set at 33.33% (or 1/3). This means if a person is deprived in one-third or more of the weighted indicators, they are considered multidimensionally poor.
DIRECT BENEFIT TRANSFER (DBT)
Rationale and Genesis: The primary motivation for introducing DBT was to reform the government’s subsidy delivery mechanism. The traditional system of price subsidies (e.g., on kerosene, fertilizers, food grains) was plagued by massive leakages, diversion, and ghost beneficiaries, leading to high fiscal costs with limited benefits reaching the intended recipients. A 2015 government estimate suggested that only about 15 paise of every rupee spent reached the poor. DBT aims to transfer subsidy benefits and other welfare payments directly into the beneficiaries’ bank accounts, plugging these leakages.
Challenges for Success: For DBT to be truly effective, particularly as a replacement for in-kind transfers, it must address two critical challenges:
Inflation Linkage: The cash transfer amount must be periodically revised to account for inflation. A fixed cash transfer can lose its real value over time, eroding the beneficiary’s purchasing power, especially in the face of food price volatility.
Product Market Accessibility: The success of cash transfers depends on the existence of well-functioning and accessible markets where beneficiaries can purchase goods and services (like food grains). In remote areas with poor market infrastructure, in-kind transfers (like PDS) might still be more effective.
Key Enablers for DBT: The successful rollout and expansion of DBT in India was made possible by the creation of a robust digital and financial ecosystem.
JAM Trinity (Jan Dhan-Aadhaar-Mobile): This concept, articulated in the Economic Survey 2014-15, formed the bedrock of India’s DBT architecture.
Jan Dhan Yojana (2014): A massive financial inclusion drive that ensured a large section of the unbanked population had access to a basic bank account.
Aadhaar: The 12-digit unique identity number provided a verifiable and de-duplicated identity, crucial for targeting beneficiaries and eliminating fakes.
Mobile Phones: The increasing penetration of mobile phones provided a platform for communication, transaction alerts, and last-mile financial services.
Business Correspondents (BC) Infrastructure: The Nachiket Mor Committee (2014) emphasized the role of BCs (bank agents) in providing doorstep banking services in areas lacking physical bank branches. They are crucial for cash-in/cash-out services, making DBT funds accessible to beneficiaries in remote villages.
Payments Banks: These are a new category of banks recommended by the Nachiket Mor Committee to further financial inclusion. They can accept deposits and facilitate payments but cannot lend. Their focus on technology and low-cost operations has helped increase the penetration of financial services.
Mobile Money and UPI: The development of a comprehensive ecosystem for cashless transactions, spearheaded by the Unified Payments Interface (UPI), allows for seamless fund transfers using mobile platforms with Aadhaar as a key identifier, further strengthening the DBT framework.
SELF-HELP GROUPS (SHGs)
Concept and Structure: An SHG is a small, voluntary association of poor people, typically from the same socio-economic background. They come together for the purpose of solving their common problems through self-help and mutual help.
Composition: An SHG is usually a village-based financial intermediary committee composed of 10-20 local women. While men’s SHGs exist, the model has been most successful with women. India has approximately 1.2 crore SHGs, with a staggering 88% being all-women groups.
Functioning: Members make small regular savings contributions over a few months until there is enough capital in the group to begin lending. Funds are lent back to the members for various purposes, with decisions taken democratically by the group. This model is built on the principle of “social collateral” or peer pressure, where the group’s collective responsibility ensures high repayment rates. This model was famously pioneered by Muhammad Yunus with the Grameen Bank in Bangladesh in the 1970s.
Formal Recognition: While they start as informal groups, many SHGs eventually register as trusts or cooperative societies to access formal credit and government schemes. The NABARD’s SHG-Bank Linkage Programme (SHG-BLP), launched in 1992, has been instrumental in linking mature SHGs with the formal banking sector.
Success Stories: India has numerous examples of successful, large-scale SHG movements that have transformed rural lives.
Kudumbashree (Kerala, 1997): A massive state-sponsored poverty eradication and women empowerment program built around a three-tier structure of SHGs.
Jeevika (Bihar, 2007): The Bihar Rural Livelihoods Promotion Society has successfully mobilized millions of rural women into SHGs.
Mahila Arthik Vikas Mahamandal (MAVIM, Maharashtra): A state-level corporation that promotes women’s development through a network of SHGs.
Looms of Ladakh: A successful cooperative that leverages the traditional weaving skills of women in SHGs to create high-value products for a global market.
Significance:
Financial Inclusion: They provide access to savings and credit for the rural poor who are often excluded from the formal banking system.
Women Empowerment: SHGs provide women with a platform for collective action, enhancing their self-confidence, decision-making power within the household, and participation in local governance.
Poverty Alleviation: They enable members to take up livelihood activities, build assets, and reduce their dependence on moneylenders.
Challenges:
Scalability and Sustainability: While there are success stories, ensuring the quality, financial discipline, and long-term sustainability of millions of SHGs across the country remains a challenge. Many are dependent on government or NGO support.
Democratic Management: Ensuring true democratic functioning and preventing elite capture (where a few influential members dominate decision-making) is a persistent issue.
MICROFINANCE IN INDIA
Definition: Microfinance refers to the provision of financial services to low-income individuals or groups who are traditionally excluded from the formal banking sector. While the most common service is microcredit (small, collateral-free loans), it also includes micro-savings, micro-insurance, and remittance management.
Key Features:
Collateral-Free Loans: The loans are provided without any requirement for collateral, relying instead on group guarantees or other non-traditional lending models.
Target Group: It is specifically designed for low-income households. The Reserve Bank of India (RBI) periodically defines the eligibility criteria. As of recent regulations, a household with an annual income up to ₹3 lakh is eligible for microfinance loans.
Providers: Microfinance is delivered through two main channels in India:
Banks: Through the SHG-Bank Linkage Programme (SHG-BLP).
NBFC-MFIs: Non-Banking Financial Company-Microfinance Institutions are specialized entities regulated by the RBI. The microfinance sector saw rapid growth through NBFC-MFIs in the 2000s, but this also led to a crisis in Andhra Pradesh in 2010 due to coercive recovery practices and multiple lending, leading to borrower over-indebtedness. This prompted the RBI to set up the Malegam Committee (2011), whose recommendations have shaped the regulatory framework for MFIs since.
STATE FINANCES
RBI’s Annual Report: The Reserve Bank of India’s Department of Economic and Policy Research annually publishes a detailed analysis of the budgets of all State Governments. The report for 2023-24, titled “State Finances: A Study of Budgets,” had the theme ‘Revenue Dynamics and Fiscal Capacity of Indian States’, highlighting the challenges and trends in state-level public finance.
Trends in Deficit: The report noted that the Gross Fiscal Deficit (GFD) of states has been under pressure. While there was some consolidation, the GFD had steadily increased in the five years prior, particularly exacerbated by the COVID-19 pandemic which simultaneously reduced revenues and increased expenditure requirements.
Aggregate Receipts of States:
States’ Own Revenue: This is a key indicator of a state’s fiscal autonomy and capacity. It comprises:
Own Tax Revenue: This includes State GST (SGST), excise duties on alcohol (which is outside GST), stamp duty and registration fees on property, taxes on motor vehicles, and taxes on electricity. The report noted a lack of consistency and high volatility in these tax collections across states. Sales tax/VAT on petroleum products remains the single largest source of own tax revenue for many states.
Own Non-Tax Revenue: This includes interest payments received by the state, fees for economic services, royalties from mining, profits from public sector undertakings, and various user charges. This source has generally been a weaker component of state revenue.
State’s Efforts to Improve Revenue:
Cess: Since states have sovereign powers of taxation on subjects under the State List of the Constitution, they can also levy cesses on these taxes. A cess is a tax on tax, levied for a specific purpose (e.g., an education cess on property tax). Once the purpose is fulfilled, the cess should be discontinued.
Fiscal Challenges:
Crowding-Out Effect: A high debt-to-GDP ratio for states means a larger portion of their revenue goes towards interest payments (revenue expenditure), leaving less for capital expenditure (asset creation like schools, roads, hospitals). High government borrowing also increases interest rates in the market, making it more expensive for private companies to borrow and invest, thereby “crowding out” private investment.
Vertical Tax Devolution Issues: This refers to the distribution of tax revenue between the Centre and the states. A major point of contention has been the Centre’s increasing reliance on cesses and surcharges. As per Article 270 of the Constitution, revenue from cesses and surcharges is not part of the divisible pool of taxes that is shared with the states. States argue that this practice undermines the principles of fiscal federalism and reduces their share of central revenues.
Horizontal Devolution Weights: This refers to the criteria used by the Finance Commission (FC) to distribute the states’ share of central taxes among the states themselves. The 15th FC used criteria like Need (population, area, forest cover), Equity (per capita income distance), and Performance (demographic performance, tax effort). States often debate the weights assigned to these criteria. The summary notes that the 15th FC did not explicitly include infrastructure deficits as a criterion, which could be a point of analysis.
PUBLIC DEBT
Constitutional and Definitional Framework:
Public Debt specifically refers to the liabilities of the Central Government that are contracted against the Consolidated Fund of India. The constitutional basis for this borrowing is Article 292.
It is a subset of the total liabilities of the Central Government. The broader term, General Government Debt, includes the debt of both the Centre and all State Governments combined.
Debt Profile of the Government:
Internal Debt: This is debt raised from domestic sources and constitutes the bulk of India’s public debt (around 94.6%). It is further divided into:
Marketable Securities: These are tradable instruments. Examples include Dated Securities (or G-Secs, with maturity over one year), Treasury Bills (T-bills, short-term instruments with maturities of 91, 182, or 364 days), and Cash Management Bills (CMBs, ultra-short-term bills to meet temporary cash flow mismatches).
Non-Marketable Securities: These are not tradable. Examples include securities issued to the National Small Savings Fund (NSSF), special securities issued to entities like oil marketing companies or fertilizer firms in lieu of cash subsidies, and postal insurance funds.
External Debt: This is debt owed to foreign creditors.
Multilateral Sources: Loans from international financial institutions like the World Bank group (IBRD, IDA) and the Asian Development Bank (ADB).
Bilateral Sources: Loans from individual countries like Japan, Germany, and Russia.
Other Sources of Government Liabilities: These are not part of Public Debt but are included in total liabilities. They include:
IMF-SDR: Special Drawing Rights holdings from the IMF.
Defence Debt: Credits for defence purchases.
FII in G-Secs: Investment by Foreign Institutional Investors in government securities is a part of total debt.
Trends and Current Status:
Rising Non-Marketable Debt: The summary notes that non-marketable debt has risen, which could be attributed to increased borrowings from the NSSF.
Debt-to-GDP Ratios (as of end-March 2023):
Central Government’s Public Debt: Stood at 57.1% of GDP.
General Government Debt: Was around 81% of GDP in 2022-23. The N.K. Singh Committee (2017) on FRBM review had recommended a combined debt-to-GDP target of 60% by 2023 (40% for the Centre, 20% for States). These targets have been breached, largely due to the economic impact of the pandemic.
Composition:
Internal vs. External: Internal debt overwhelmingly dominates Public Debt, which is a positive sign as it reduces currency risk.
Currency Composition of External Debt: The largest portion of external debt is denominated in US Dollars, followed by the Indian Rupee, SDRs, and Japanese Yen.
Prelims Pointers
GDP Estimation Changes (2015):
Base year shifted from 2004-05 to 2011-12.
Headline GDP measure changed from GDP at Factor Cost to GDP at Market Prices.
Sectoral estimates are now given as Gross Value Added (GVA) at basic prices.
Methodology aligned with the System of National Accounts (SNA), 2008.
National MPI:
Nodal Agency: NITI Aayog.
Initiative: Part of the Global Indices for Reforms and Growth (GIRG) initiative.
First report (2021) based on NFHS-4 (2015-16) data.
Methodology: Alkire-Foster (AF) methodology.
Poverty Identification: A person is MPI poor if their deprivation score is ≥ 33.33% (1/3).
Direct Benefit Transfer (DBT):
Key Enablers: JAM Trinity (Jan Dhan, Aadhaar, Mobiles).
Last-mile service delivery: Business Correspondents (BCs).
New type of bank for financial inclusion: Payments Bank.
Self-Help Groups (SHGs):
Typical composition: 10-20 local women.
Statistics: India has around 1.2 crore SHGs; 88% are all-women groups.
Non-Marketable Securities: Securities issued to NSSF.
Current Status (Mar 2023): Central Public Debt at 57.1% of GDP; General Govt Debt at 81% of GDP.
Dominant component: Internal Debt (approx. 95%).
FRBM Review Committee (N.K. Singh Committee) recommended a combined debt-to-GDP target of 60%.
Mains Insights
GDP ESTIMATION IN INDIA & ITS LIMITATIONS
Debate on Methodology and Credibility: The 2015 change in GDP methodology sparked a significant debate among economists. While the government maintained that the new method was more aligned with global standards and captured the corporate sector better, critics like former CEA Arvind Subramanian argued that the new series overestimated growth and was inconsistent with other macroeconomic indicators like credit growth, investment, and exports. This raises questions about the reliability of data for policy-making.
GDP as a Policy Guide: While GDP is an imperfect measure of welfare, it remains a crucial indicator for macroeconomic management (e.g., for the RBI’s monetary policy and the government’s fiscal policy). The challenge for policymakers is to use GDP data judiciously while supplementing it with other indices like HDI, MPI, and environmental accounts to formulate more holistic and sustainable development strategies.
Moving Beyond GDP: The limitations of GDP have led to a global discourse on alternative measures. For GS Paper III (Economy), one can analyze the feasibility of adopting ‘Green GDP’ (which accounts for environmental degradation) or frameworks like Bhutan’s ‘Gross National Happiness’ to better align economic policy with social and environmental well-being.
POVERTY, INCLUSION, AND SOCIAL JUSTICE (DBT, SHG, MPI)
Targeting and Efficiency (GS Paper II/III): The shift from universal subsidies to targeted interventions using tools like MPI for identification and DBT for delivery represents a major paradigm shift in India’s welfare architecture. This can be analyzed in terms of efficiency gains (reduced leakages) versus the risks of exclusion errors (genuine beneficiaries being left out due to digital or documentation gaps).
Multidimensional Poverty and Policy Intervention: The National MPI allows for a granular analysis of poverty, highlighting specific deprivations in different regions, districts, and social groups. This is a powerful tool for evidence-based policymaking, enabling targeted interventions. For instance, if a district shows high deprivation in ‘years of schooling’, policies can be focused on improving school enrollment and retention there.
Empowerment vs. Entitlement (GS Paper II):
DBT: Represents an entitlement-based approach, ensuring citizens receive their financial share. However, it can be critiqued for potentially fostering dependency if not linked to productive activities.
SHGs: Represent an empowerment-based model. They build social capital, financial literacy, and entrepreneurial skills, leading to more sustainable poverty reduction. The success of SHGs in promoting women’s political participation (e.g., getting elected to Panchayats) is a significant dimension of social empowerment.
Challenges in Financial Inclusion: While the JAM trinity has been successful, the “last mile” remains a challenge. Issues of dormant accounts, connectivity problems in remote areas, digital and financial illiteracy, and the viability of the Business Correspondent model need to be critically examined.
FISCAL FEDERALISM AND DEBT SUSTAINABILITY
Erosion of Fiscal Federalism (GS Paper II): The increasing share of non-shareable cesses and surcharges in the Centre’s gross tax revenue is a critical issue in Centre-State financial relations. This centralizes revenue and reduces the untied funds available to states, undermining their fiscal autonomy and contradicting the spirit of cooperative federalism. This can be linked to the recommendations of various Finance Commissions.
State-Level Fiscal Prudence (GS Paper III): The fiscal health of states is crucial for national macroeconomic stability. The trend of some states resorting to populist schemes financed by high borrowing has long-term consequences. An analysis could focus on the need for states to enhance their own revenue sources (both tax and non-tax) and adhere to fiscal discipline norms, as recommended by the FRBM Act.
Public Debt Sustainability (GS Paper III): India’s high General Government Debt-to-GDP ratio (over 80%) is a significant macroeconomic concern.
Cause-Effect: High debt leads to a larger interest burden, which crowds out essential social and capital expenditure. It can also fuel inflation and create vulnerabilities to external shocks.
Debate: One school of thought argues for fiscal consolidation and debt reduction as a priority. Another view suggests that in a developing country like India, public debt used for productive capital investment that boosts future growth is justifiable. The quality of expenditure financed by debt is therefore a key analytical point.